Three strikes may put BHP on M&A bench

Investor attention is centred on the next big deal for
BHP Billition
following its third failed union, Potash Corporation of Saskatchewan, with chief executive Marius Kloppers at the helm.

Speculation continues to mount that the Australian resources powerhouse has
Woodside Petroleum
in its sights, but some corners are betting that the company will stay off the acquisition trail for a while unless an absolute sure thing presents itself.

“Marius has staked his internal reputation on completing these deals and I think he is substantially weakened by [the Potash result]," a former general counsel of a global resources company who declined to be identified said.

“I would be surprised if he would launch any other action if he didn’t have 100 per cent certainty of the deal completing. If he takes one more swipe at M&A that he fails to complete then I think it may be history for him.

“The preference is likely to be towards organic growth for a while. They have got their hands full with some massive organic projects to develop," the person said.

Woodside, put in play after Royal Dutch Shell put its 34.5 per cent stake in the company up for sale last week, is arguably an attractive oil and gas acquisition, according to analysts. But investors have their doubts.

Pengana Capital portfolio manager Rhett Kessler said it was a clever move by Shell to put Woodside into play but that Woodside would be a “huge bite" for BHP and a deal “that would substantially change the overall mix and therefore nature of BHP’s business".

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“It would heavily skew it towards petroleum and I think would ruin the optimal balance that Marius Kloppers has achieved with his portfolio of assets.

“If you want to skew what is an easily understandable business like BHP to those levels of complexity, I don’t know whether that is a positive. At a hundred miles up it probably makes sense at first blush, but when you get down to the detail I’m not so sure."

Argo Investments and Perpetual, both top-20 investors in Woodside and BHP Billiton, remain somewhat sceptical about the likelihood of a deal eventuating with Woodside.

“On valuation grounds, despite Woodside having excellent assets and reasonable growth opportunities, we again would, similar to the Potash acquisition, say that we would struggle to see a value accretive deal for shareholders," said Perpetual Global Resources Fund portfolio manager James Bruce.

Perpetual has maintained a view that the Potash bid was not as value-accretive for shareholders as a buyback would be.

BHP is trading on “incredibly low multiples", which makes it difficult to see a deal happening that is “more accretive than buying back shares", Mr Bruce said.

“Despite Woodside’s assets, in our view the current stock is reflecting much of that growth. As a result, we don’t see the accretion to BHP in acquiring Woodside at the current prices."

Argo Investments chief executive, Jason Beddow, said the market seems to like the idea of BHP moving on Woodside. He added, however, “I’ve never been a big believer", as a personal view.

The rhetoric, he said, has been that “it has to be an Australian-based company that could own Woodside ever since Shell was knocked back" in 2001. “With their North West Shelf partnership it all makes sense for it to be BHP."

But with BHP trading on a single digit multiple and Woodside at 20 times, he said: “I hardly see how it is an accretive deal unless BHP somehow gets their petroleum business re-rated through the transaction."

Perpetual and Argo acknowledge the heightened completion risk cross-border deals face as governments increasingly intervene in transactions. Both investors also expressed broad support for the company and its CEO.

Pengana’s Mr Kessler added that Mr Kloppers “has shown an ability to play by the numbers, and always have shareholders’ interests at heart".

But the failed tilts in recent years have come at a not insignificant cost to shareholders. BHP has racked up more than $US850 million in transaction costs as a result of the failed takeovers. Potash cost $US350 million, the price tag of its unsuccessful tilt at Rio Tinto in 2008 was $US450 million, and the abandoned joint venue with Rio Rinto cost $US75 million.

“It’s not just the external fees, the management time was overwhelming," the unnamed general counsel said. “I think BHP has been sidetracked. You have not had consistent management that has been clear-sighted as to what to execute and how. The risk to the business in terms of distraction and frustration is huge and it has gone on too long."

The person said: “I would have thought the chances of a major M&A are quite small", adding that BHP management will spend time concentrating on “a pent up demand for internal project development".

No matter what, BHP’s next big M&A move will be closely watched and speculated on in coming months.